Incident: The company released its report for the first quarter of 2023, achieving revenue of 125 million yuan, a year-on-year decrease of 33.84%, and the net profit of the mother was 21 million yuan, a year-on-year decrease of 33.05%. The company's performance was under pressure in the short term, and long-term growth remained unchanged.

2023Q1 performance is under pressure in the short term, and demand is expected to improve. The company's performance increased dramatically in 2022, benefiting from factors such as high industry prosperity and increased company business development efforts. Among them, natural flavors achieved revenue of 328 million yuan, a year-on-year increase of 6.12%, a gross profit margin of 42.25%, an increase of 1.42 pct over the previous year; coolants achieved revenue of 244 million yuan, an increase of 29.44% over the previous year; gross profit margin was 32.44%, an increase of 0.43 pct over the previous year; synthetic fragrances achieved revenue of 120 million yuan, an increase of 9.05% over the previous year, and a gross profit margin of 26.29%, an increase of 4.13 pct over the previous year. Affected by the 2023Q1 pandemic and overseas inventory removal, the company's performance declined year-on-year. It is expected that as domestic and foreign demand recovers, the company's performance is expected to improve.

The focus is on high-margin products, and industry concentration is expected to increase. The company is a major producer of high-end fragrances in China. It has successfully developed more than 160 products in the three series of natural flavors, synthetic fragrances and coolants. At the same time, the company used its technical advantages to increase investment in high-margin products. In 2022, synthetic folic alcohol revenue increased 278.18% over the same period last year. In 2022, the global flavor and fragrance market was US$29.2 billion, and the industry maintained steady growth. Based on the characteristics of various flavors and fragrances, small categories, and fast delivery, combined with stricter environmental protection policies, it is expected that in the future, small and medium-sized enterprises and backward production capacity will be phased out, and leading companies will continue to increase their market share through advantages of scale and technology.

Market demand for new e-cigarettes continues to grow, which will drive rapid growth in sales of coolants in the e-cigarette sector. In recent years, demand for vaporized e-cigarettes and HNB markets has been growing steadily. The market size in 2021 was US$22.8 billion and 28.8 billion respectively. The compound growth rates since 2016 have been 19% and 83% respectively. It is expected that as China increases its deployment of HNB and the demand for new types of tobacco, it will drive demand for tobacco flavors. In 2022, the company achieved sales of about 517.8 tons of WS-23 coolant products. Cooperation with Kraft Foods and Shenzhen Fangxin Technology Co., Ltd. (manufacturer of RELX e-cigarettes) continues to deepen, and sales are expected to continue to grow steadily in the future.

Set up a factory in Thailand to open up new growth space. At present, the construction of the first phase of the company's Nantong project has been completed and is in the trial production stage. At the same time, the company plans to build a production base in Thailand and plan products such as vanillin, oak moss, benzaldehyde, benzyl alcohol, etc., which will help the company reduce tariffs and expand overseas coverage. Furthermore, the company's ongoing research project “Development of a method for preparing cinnamyl cinnamate” progressed smoothly. It was completed as scheduled in 2022, and is currently in the industrial trial production stage.

Give an “increase in holdings” investment rating. The company's net profit from 2023-2025 is estimated to be 150 million, 240 million, and 280 million yuan respectively, and the EPS is 1.8, 2.9, and 3.5 yuan respectively. The current stock price corresponding to PE is 19.7, 12.3, and 10.2 times, respectively, giving an “increase in holdings” investment rating.

Risk warning: new product development falls short of expectations, environmental protection, large fluctuations in raw material prices, lifting of the ban on restricted stocks